Liquidity Centers Are Exchanges' New Revenue Centers

Looking for alternative revenue sources, NYSE Euronext, Nasdaq and CME Group have built out liquidity centers that offer services ranging from colocation to on-demand trading technology and market data.

With the rise of electronic trading and the shift of U.S. equities and options order flow from traditional market centers to servers located in nondescript data centers often miles from historic financial hubs, the top exchanges have been seeking to cash in on Wall Street's relentless desire for high-speed trading and computing power. Now, with trading volumes sagging for the second year in a row, the exchanges are eyeing alternative sources of revenue with renewed urgency.

Major players including NYSE Euronext and Nasdaq OMX have developed high-tech liquidity centers with ample space for customers to place their equipment as close as possible to the exchanges' matching engines. Most recently, CME Group, operator of the Chicago Mercantile Exchange and a powerhouse in derivatives trading, announced that it would go live in January with colocation services out of its newly built, 428,000-square-foot facility (which is the length of seven football fields) in Aurora, Ill., outside Chicago.

But these new liquidity centers are more than just the computer warehouses of old; today's cutting-edge data facilities come equipped with advanced dual power grids, high-speed fiber networks, state-of-the-art cooling systems and top secret security.

SHIFTING LIQUIDITYThanks to the rise of electronic trading, the market centers of the financial world no longer are found on Wall Street, but rather in places such as Mahwah and Carteret, New Jersey. Check out WS&T's interactive map for key data on the major liquidity centers in the New York area.

The build-out of liquidity centers reflects the pervasive growth of electronic trading and the demand for colocation space on the part of brokerage firms, high-frequency trading shops and hedge funds that execute trades at near the speed of light. "The majority of executions are done electronically, and with the rise of algorithmic trading, the speed of execution has become increasingly important," says Roger Freeman, a director and analyst with Barclays Capital who covers the major global exchange operators.

But once the financial firms are inside these liquidity centers, they need connectivity to other equity and options markets, data services, and even additional computing power. So on top of providing what is commonly known as colocation services, the big exchanges also may see a potential windfall from providing customers with technology and related services, such as high-performance trading platforms, market data, network connectivity and even on-demand cloud computing. "Colocation, networking, interfacing, risk management and those kinds of services are where the legacy equities exchanges are focusing their growth efforts," according to Freeman.

"Our job is to provide hosted and managed services in our data center," says Jerry Capaci, VP, SFTI and colocation services in the Americas, at NYSE Technologies, the commercial technology arm of NYSE Euronext. "Customers can focus on the value they can provide through their algos and trading strategies, rather than on the pipes or infrastructure."

NYSE Technologies has been perhaps the most aggressive technology provider among the exchanges, building a virtual ecosystem within its U.S. data center. NYSE Euronext opened its mammoth, 400,000-square-foot facility in Mahwah, N.J., in August 2010. The exchange operator hosts the matching engines for three U.S. equities markets (the New York Stock Exchange, NYSE Arca and NYSE Amex) and two U.S. equity options markets (Amex and Arca) in the data center. Larger than a World War II aircraft carrier, the Mahwah facility was "future-built" with thousands of square feet of extra space to meet Wall Street's insatiable need for computing power and connectivity.

For the NYSE, Speed Sells

But while the modern data center is massive, speed is the name of the game in attracting customers. According to Capaci, NYSE clients colocated in the Mahwah data center are connected to a high-speed liquidity network that provides the fastest route to the exchange's matching engines for order flow and market data.

"Having our customers directly next to our own matching engines is really the crown jewel of the exchange," Capaci comments, noting that NYSE Euronext also built a second primary liquidity center, in Basildon, England, outside London. "Just like the trading floor, there's a community there," he says of the liquidity centers.

The virtual community of traders in Mahwah consists of market makers, investment banks, brokers and sponsored exchange members, such as hedge funds, all of which are central to NYSE Euronext's commercial strategy of building liquidity and providing access to other markets. "That community will be able to grow, and its members are able to avail themselves of a host of services within that community," he says, adding, "We not only offer colocation, but a suite of market data and transaction solutions including a filtered options feed, access to market data from every U.S. market venue, and applications such as the exchange's Risk Management Gateway to help customers cope with evolving regulations."

NYSE Technologies also offers other services. "If the client wants just a server, we have a compute-on-demand service," Capaci says, referring to the NYSE's Capital Markets Community Cloud, the first capital markets industry-specific cloud platform, which the company introduced in June 2011. Adds Eric Ryan, an NYSE spokesman, "The cloud could be another way to access the liquidity center."

Nasdaq Powers Up With a Partner

While NYSE Euronext built its own liquidity centers, Nasdaq OMX leases a 200,000-square-foot space in Carteret, N.J., through a partnership with Verizon Business Services. Nasdaq OMX hosts all three of its U.S. equities matching engines and its two options matching engines in the Verizon-owned facility and also offers colocation facilities, access to high-speed market data feeds and connectivity to other liquidity centers.

"We felt it was a better route to partner with a provider" whose core competency was running a data center, comments Stacie Swanstrom, head of access services at Nasdaq OMX. According to Swanstrom, Nasdaq switched its strategy in 2007 from building its own data centers to working with Verizon and has gone through two expansions with the telecommunications provider, completing the last one in 2010. Nasdaq has the majority of the space in the Verizon-owned facility and currently has the capacity to expand, she adds.

While some competitors are touting the advantages of constructing their own data centers, Swanstrom doesn't see the point of building out more space. "We didn't feel it was productive to build a whole new data center. To house cabinets -- it's a power game now, not space," she insists. "People are using fewer cabinets but need more power out of them. So you need less physical space than power. Even though the machines are getting smaller, firms want to put lots of servers within a rack."

Meanwhile, Swanstrom adds, Nasdaq does offer some cloud functionality as software as a service, but only for pieces it thinks are economically viable.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio